The
Cleared Hectare method of valuation is the most used method for the
valuation of rural lands and is generally, the most reliable method.
The problems with the capitalization method and DSE methods were
outlined in the previous two parts. Other reasons which favour the
Cleared Hectare method are:

Land values do
not correlate well with produce prices

A large part of
the Eastern and Central Divisions of NSW are subject to an urban
influence. This influence of land values is not reflected in either the
income or units of production approach.

CLEARED
HECTARE

A
cleared hectare of land is land which is "fully" cleared
only. Therefore, it excludes all physical improvements such as
fencing, water Improvements, buildings and yards and "invisible"
improvements such as pasture improvement.

"Fully"
cleared does not mean that every tree must be removed. Rather, it is
the most economical clearing for the farm's long run viability and
therefore, varies according to the highest and best
use of the land. For example:

The
formula shows the major disadvantage compared with the DSE method in
that many more components are required to be valued separately to
obtain market value. Therefore, there is the possibility of greater
accrued error.

However,
since the most important variables in the valuation equation for
medium to large rural properties are land, clearing and pasture
improvement, about half of the market value is not all sensitive to
the fencing, water and building variables.

To
be able to evaluate a Cleared Hectare value it is common to value the
land and clearing separately as it is rare for the subject and sale
property to be comparable in the degree of clearing. Therefore, the
valuer should understand the factors affecting the cost of clearing
and hence the value of clearing.

The
sales used to determine the market value of clearing must meet the
following criteria:

The willing
seller willing buyer theory. That is, that price the
subject property sell for assuming a "willing" but not overanxious
buyer and seller both fully cognizant of all those actors which affect
market value - Spencer v Commonwealth (1907) 5
CLR 418. This has been modified somewhat by modified Spencer
which simply states that the sale is a good sale if it
has been exposed in the market place and promoted in the normal manner.

The subject and
sale properties are comparable

The sales have
occurred about the same time.

ANALYZING
SALES FOR THE VALUE OF CLEARING

This
is the simplest and most direct method and therefore, there is little
error. It is the preferred method if comparable sales are available.

EXAMPLE

A
sale of a fully cleared property ($400/ha) is compared with the sale
of an
otherwise comparable virgin property ($100/ha). Therefore,
the value of clearing = 400-100 = 300/ha. However, in practice it is
unusual to get two sales at opposite ends of the spectrum. It is more
likely that both properties have been partly developed.

A block 25% cleared sells for $175/ha
as opposed to the sale of an otherwise identical block, 50% cleared, at
$250/ha. When
comparing the two sales above, the difference in value mustbe
the difference in value of the clearing. The
difference equals $250-$175 = $75 for the 25% clearing and therefore,
the value of 100% clearing = 4 * $75 = $300/ha.

Once
the value of clearing is known the land or site value can be found. The
sale of block 25% cleared adjusted to a virgin block is the current
value of
$175/ha less the value of the clearing:

$175
- ($300 * .25) = $100/ha

The
first two sales above represent the dipole or extreme cases of
timber development; 0% and 100%. The degree of development is usually
determined by canopy cover for example, by using air photos. However,
the degrees of clearing shown is higher if the
timber is scattered rather than contained in the one area. For
example, a sale showing 50% by canopy cover in in actuality be 55%-60%
developed
as the removal of undergrowth is not visible on the air photo.

The
removal of scattered camps is more inefficient and difficult than the
removal of a larget virgin stand. This is because
the operator can more efficiently and quickly "attack" a
line, the width of the block. On the other hand with a 100% virgin
stand, the operator
initially, has no room to attack the timber. Therefore, up to a
point, the greater the number of fronts, the greater is the
percentage development.

Properties can ahve
the same percentage of clearing based on
canopy cover; 50%. However, with an increasing
number of fronts, initially is more efficient for the operator to
attack. However, a point is
reached where there are too many fronts and the operator spends too
much time moving from one front to another. Where the stands are
smaller, costs rise as the operator
has to cover nearly all of the property and such costs such as
burning off, stacking and grubbing are also higher.

THE
"REAL" COST OF CLEARING

The
cost to clear is the "real" cost that is, after taxation
benefits. Else-Mitchell J in the Goobang case covered
the problem of cost not necessarily equal to value. Although the
following quotation is long it is one of the best statements
on the value of rural improvements to come from the courts:

A
common course which is followed for this purpose is to take sales of
improved land and to make deductions from the price paid on such
sales which will indicate the value of the land in an unimproved
state. Since these sales are for the most part of land which has
been improved by the erection of structures, fencing, and farm
buildings, as well as the clearing of timber and pasture improvement,
this process involves the deduction from the sale price of improved
properties of the value or depreciated cost of the various
improvements. To deduct the cost at current rates of effecting such
improvements would be improper, for cost is not always reflected in
value and expenditure on an improvement does
not necessarily result in an increment of the same amount to the
value of the land; sometimes it will be more and sometimes it will
be less depending upon a variety of factors including the durability
of the improvements, its necessity as a measure of proper
development of the property, and so on.

In
some of the authorities in which this matter has been discussed a
distinction seems to have been drawn between improvements in the
nature of buildings or other structures and those which relate only
to the land itself such as clearing and timber treatment and
statements will be found in the cases which suggest that in the case
of structures their value or depreciated cost only is to be deducted
whilst with clearing, timber treatment and other improvements to land
itself the actual cost at current rates is to be deducted. This
differential treatment might. appear to be justified by the fact that
buildings and other structures depreciate with the passage of time
whilst clearing. timber treatment and other improvements to the land
itself do not. But a little reflection will show that it is erroneous
to make any distinction between improvements of one sort or another
and indeed if the current cost of all improvements were to be
deducted from the value of land as disclosed by sales of improved
land the result might well be a negative figure. Moreover it will be
evident that the measure of appreciation of a building or structure
may or may not be greater than the measure of depreciation of the
currency in which its value is to be expressed and it follows that
the money value in an improvement may increase or remain static
despite its obsolescence so that current cost and actual cost less
depreciation as simple formulae in ascertaining the added value of
improvements may be equally erroneous as guides to unimproved value.
This is not to say however that depreciated replacement cost may
never be employed as a means of ascertaining the value which an
improvement has added to land but as Dr Murray has pointed out
(Principles and Practice of Valuation p 220) that method of
calculation can be validly employed only under certain conditions one
of which is that the value assigned to the improvements by that
method is equal to their value as disclosed by sales.

Else-Mitchell
J continued to consider the effect of taxation benefits on the cost
of clearing:

There
is another ground upon which it seems to me erroneous to treat the
actual cost of making improvements as a deduction from improved
values for the purpose of ascertaining unimproved values and this
is to be found in the special concessions to primary producers
provided by the Income Tax and Social Services Contribution
Assessment Act 1936- 1962. These concessions are mostly contained in
s75(1) and allow of the deduction from income of expenditure
incurred in any year on the following matters -(b)
The destruction and removal of timber, scrub orundergrowth
indigenous to the land;(c)
the destruction of weed or plant growth detrimental to the land(d)
the preparation of the land for agriculture(e)
ploughing and grassing the land for grazing purposes(h)
The construction of dams, earth tanks, under groundtanks,
irrigation channels and so on. In
an explanatory booklet published under the authority of the Hon.
the Treasurer for the Commonwealth in June 1965 it is pointed out "that
comparable deductions are not allowed to all
industrialists or traders or other taxpayers engaged in business"
(p 22) and that the effect of deductions under s75 of the Act is
that capital gain may be achieved by a primary producer effecting
improvements to rural land at a net cost to him
substantially less than the actual cost of the improvements, the
amount of the net cost depending on the rate of income tax
otherwise payable by the landowner (p 24). It
will be apparent that these income tax concessions enable a
primary producer to undertake improvements to land which in terms of
actual cost exceed the amount by which they add to the
value of the land and in consequence a buyer of unimproved land
who has a substantial income from primary productions or otherwise will
be able to pay for that land in the market a much
higher sum than a buyer who has no other income. But even the buyer
who is in this latter position can look forward to progressive
benefits from income tax deductions as the land is gradually
improved and its income earning capacity increases.

No
doubt if there were frequent sales of land in an unimproved state
the effect of the income tax concessions would be reflected in the
price paid on the market for such land to the extent that such
price, with the addition of costs of clearing, timber treatment, and
the like, would exceed the market value of the property in an
improved condition. This I think, is hardly capable of refutation
but it is another question whether the measure of the excess price
which might be obtained in the market for land in an unimproved state
is capable of being estimated solely by an understanding an
application of the provisions of the Income Tax and Social Services
Contribution Assessment Act and the rates of income tax fixed by the
complementary Income Tax Act which is passed each year. -
Objections to Valuation - Shire of Goobang (1969) The Valuer,
January 1970, p57 at pp 65-66.

Opportunity
cost arguments dictate that an intending purchaser will
not pay more for clearing than the "real" cost for the
purchaser to carry out the clearing him/herself, after tax. Optimum
clearing can be expressed on a continuum with market gardening at one
end and "relief grazing" at the other. Optimum clearing is
the minimum amount of clearing required to use the land at it's
highest and best use.

A
prudent purchaser will not pay any more for clearing than the value
of optimum clearing. For example, in grazing country where optimum
clearing is well cleared with camps (wool growing) but has been
cleared ready for plough, the prudent purchaser will pay only at the
most, the value of “well cleared” even though a greater amount of
moneyhas
been spent on actual clearing. That is, the clearing represents
overcapitalization of the land. Therefore, land with only 50%
clearing by canopy cover may well be 100% clearing for wool grazing
purposes.

PASTURE
IMPROVEMENT

Generally,
the second most important component of value is pasture improvement.
TA great deal of the discussion above and the comments of
Else-Mitchell J applies equally to pasture improvement.

PRIMARY
AND SECONDARY METHODS OF VALUATION

As
with other valuations, non urban valuations should be determined with
two methods. The Cleared
Hectare method is usually the primary
method and the Dry Sheep
Equivalent method, is usually the
secondary or "check" method. If the
two values are close, then the secondary method supports the
primary method and the value determined by theprimary
method is adopted as this is the most reliable.

In
arid pastoral lands where the value of a property is directly a
function of the number of stock that can be carried (and is
determined by the relevant government authority), the primary method
is the Dry Sheep Equivalent
or Beast Area method. The c cleared hectare
or income method can be used
as the secondary '"check"
method.